How IBM’s weak hardware business explains its future plans

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IBM may have invented the PC, but it wisely exited that market long ago.(IBM)

IBM’s third quarter earnings are flat compared to a year ago, but what’s telling about the company’s report are the areas where revenue slipped: Most were in hardware. Sales of physical systems were down 13% year over year, with mainframes down 20% and production at IBM’s chip foundry–where it makes microprocessors for itself and its customers–down 25%. Worldwide, sales of semiconductors are projected to contract 0.1% in 2012, due to the global economic slowdown creating weak sales of PCs and other devices that use the high-end silicon IBM makes.

What has buffered IBM against the declining market for high performance chips, which has also buffeted competitors like Intel? Most immediately, diversification into consulting and services. Today, 40% of IBM’s revenue and 60% of its profits come from software license fees and services contracts, both of which it sells on a subscription basis. It’ll need to increase that percentage—or find other sources of revenue—to counteract chip woes going forward.